2) Top-up loan This loan is taken in addition to an existing home loan.

LOAN AMOUNT: Equivalent to originally sanctioned home loan, subject to a maximum limit, which varies for banks. It can also be calculated as percentage of the market value of property, minus the outstanding home loan. TENURE: Up to 20 years; can also be linked to original home loan. RATE: 50-200 basis points more than your existing home loan rate. PROCESSING FEE: 0.35-1% of loan amount.

3) Home equity loan Such a loan allows you to borrow against the value of your residential or commercial property.

LOAN AMOUNT: 50-65% of the current property value. TENURE: Up to 15 years. RATE: 11.5-15.5% PROCESSING FEE: 0.5-1.5% of loan amount.

4) Overdraft against property This option lets you take an overdraft against your property.

LOAN AMOUNT: Up to 65% of the value of the property, subject to a maximum limit. TENURE: Up to 10 years. RATE: 12-14% PROCESSING FEE: Up to 1% of loan amount.

5) Reverse mortgage The property owner can borrow against his home equity and get regular monthly payments or a lump sum.

LOAN AMOUNT: 45-65% of the current value of the property, subject to a maximum limit. TENURE: 15-20 years RATE: 11-13% PROCESSING FEE: 0.25-0.5%

Adhil Shetty- CEO -BankBazaar.com | Source: MoneyControl.com
Mohan and his wife Manjula both retired lived in their own home in Hyderabad city. Over the years while the couple were working and was hoping that their savings would be sufficient for them in their sunlight years. Now with inflation rising steadily in the last few years, the couple is faced with a dilemma of a monthly income for their day to day expenses as their pension was insufficient. Mohan and Manjula approached a banker who suggested them to look at reverse mortgage loan which can bring them monthly income enough to take care of their day to day expenses. Though initially skeptical, they understood later there is no harm in taking a reverse mortgage and it is a flexible loan for seniors.

Let’s have a look at the intrinsic advantages of reverse mortgage loans.

Working Mechanism of Reverse Mortgage Loan:

A reverse mortgage as the name suggests is the exact opposite of a traditional home loan. In a reverse mortgage scheme, a senior citizen above the age of 60 years living in a self occupied home can receive a regular income from a bank against mortgaging of the home. The borrower can continue to live in the home till his lifetime and continue receiving a periodic monthly payment, just like a salary or pension.

In case of the death of the borrower seeking a reverse mortgage loan, the spouse can continue living in the home and receive the amount. They can close the loan at any tme by settling the amount paid to them with interest, or their heirs can either repay the loan or allow the bank to dispose of the property and recover their dues.

When a home is pledged with the bank, the bank arrive a financial value of the property keeping in mind the market value of the location. Bank then disburses loans up to 40-90% of the market value of the property with a maximum cap of Rs. 1 Crore. The loan amount may be used by the senior citizen borrower for varied purposes like up-gradation or renovation of residential property, medical emergencies etc or even opt for a fixed monthly income. With the bank paying out monthly installment to the borrower the equity or the individual’s interest in the house decreases.

Benefits of Reverse Mortgage Loans: Reverse mortgage loans offer a number of benefits for senior citizens and are slowly getting popular with a number of retirees. Some of the most significant benefits of opting for a reverse mortgage loan include:

• Simple Eligibility Criteria: Banks allow reverse mortgage loan to house owners above the age of 60 years. In case of a co-applicant the younger borrower cannot be less than 55. Reverse mortgage loan is permissible to only those individuals who are owners of a self-acquired and self-occupied residential property. The borrowers must be residing in the property which is being mortgaged.

• Regular Income for the Elderly: Reverse mortgage loan allows elderly citizen a chance to get a monthly income by mortgaging their house or residential property. This is much beneficial for those who missed the bus while doing efficient planning for their retirement as the loan offers a steady monthly income for the elderly, helping them to live without depending anyone.

• Flexible Payment Options: The borrower has the option of seeking a fixed monthly income, or quarterly or annual lump sum payment for the reverse mortgage loan depending on the financial overview of the borrower.

• No Tax Obligations: Since the money received through a reverse mortgage loan is considered to be a loan and not any income, it is free from any tax liability making it an attractive option for the elderly.

• Easy Prepayment Facility: Reverse mortgage loans can be prepaid along with interest anytime during the loan tenure without any extra charges.

• Easy Loan Settlement Process: The reverse mortgage loan become due either when the tenure period ends of the last surviving borrower dies. In case of end of tenure, the banks allow the borrower to repay the loan and get back the mortgaged property. In case of death of the loan borrowers, the kin or legal heirs of the property are asked to settle the loan. If they are unable to settle the loan or are not interested in settling the loan, the bank recovers its dues by disposing off the property in an open auction. If the money including principal and interest is less than the mortgaged loan due to fall in property prices, the bank absorbs the loss. However if the money received from the sale is higher than principal and interest amount of the loan, the excess funds are distributed to the legal heirs of the borrowers.

By Sanjeev Sinha, ECONOMICTIMES.COM | 10 Dec, 2014, 11.57AM IST | Economic Times
Reverse mortgage has proven to be a very effective tool to supplement one’s income in old age, particularly in Western countries like the United States. However, despite being introduced 7-8 years back in India, it has failed to take off the way industry experts had hoped.

But before finding out the reasons, we need to take a look at what reverse mortgage is all about.

Reverse mortgage, in fact, is a special type of loan against a home that allows the borrower to convert a portion of the equity in the property into cash. In simple words, reverse mortgage is a scheme where any individual (senior citizen) who has a self-occupied house and is looking for regular income can mortgage it to a financial institution. In return, the institution pays the person a fixed periodic (monthly, quarterly, annual) installment or a lump-sum amount at a defined rate of interest.

“The payout is generally for a fixed term of 15-20 years, after which the borrower or legal heirs (on death) can release the house by either repaying the loan or the company settles the amount by selling the house. Any excess in the process is paid to borrower or legal heirs as the case may be,” says Jitendra P.S. Solanki, a SEBI-registered investment adviser and founder of JS Financial Advisors.

With a traditional second mortgage, or a home equity line of credit, one must show sufficient income versus debt ratio to qualify for such a loan, and needs to make monthly payments towards the mortgage. However, reverse mortgage pays the borrower, and is available regardless of current income or assets.

“The amount that can be borrowed depends on the borrower’s age, the current interest rate, other loan fees, and the appraised value of the property. One does not have to make payments, because the loan is not due for paying off as long as the house is one’s principal residence. However, like all homeowners, the borrower is still required to pay applicable real estate taxes and other conventional payments like utilities,” says a Jones Lang LaSalle (JLL) India report.

Thus, as it is clear, unlike the other lines of credit, reverse mortgage doesn’t require income or credit history of the borrower as repayment is based on the value of the house owned by the borrower. Also, “in reverse mortgage, the borrower doesn’t have to pay principal or interest payments during the loan tenure (15-20 years). More importantly, the amount received from the lender with property as collateral is not taxable, as the same is considered as loan and not income with ownership fixed with the owner,” informs Chintan Patel, director-real estate practice, Ernst & Young.

However, despite having so many advantages and global acceptability, reverse mortgage has not managed to captivate the Indian market because of multiple reasons.

Anuj Puri, chairman & country head, JLL India, says, “In the first place, it is a predominant tendency for Indians to treat owned property as an important family asset. This asset is usually intended to be inherited by the next generation, and would be liquidated only as a last resource. Also, the elderly tend to hold a place of importance in Indian culture. Property-owning senior citizens are generally assured of care and support in their golden years.”

Echoing similar views, Patel says that property ownership in India is considered as an inheritable subset, which is ideally handed over to the legal heirs. Also, the owned property is considered for trade unless there is a substantial benefit or imperative financial crisis of owner.

Another point to note is that in reverse mortgage, the loan amount is capped at Rs 50 lakh – Rs 1 crore by the lender. Therefore, availing the same in key metro cities, where property prices usually range from Rs 1.5 to Rs 3 crore, is less lucrative for the borrower.

The structure of the product is also cited as the main reason for its unacceptability in India. In fact, when launched, it was a loan from a bank for a fixed term up to 5-20 years. There were also a few disadvantages in this product. Firstly, there was no lifetime income which most retirees search for in any fixed income avenue. Secondly, the liability of repaying the loan was set to arise as the term gets over. So, if someone lives the term, one runs a risk of loosing the house if one is not able to repay the loan.

“This can be a dangerous situation for any retire who have only a house to live. Also, the income offered in this product was quite low as it was a loan product from a bank which is more dependent on interest rate environment. Since there are lots of emotions attached to a house ownership, not many came forward to mortgage their house for such a low income and take the life risk of loosing the asset if they live thereafter,” says Jitendra Solanki.

Another thing is that most Indians have erroneous perceptions about reverse mortgage as the product itself is not as well understood in India as traditional home loans are. “The fault probably lies with the banks, who should be trying to educate their clients on what reverse mortgage does and does not mean. For instance, it does not mean that the property is irretrievably pledged to the bank. Also, the guidelines surrounding the product need to be made more attractive so that more people see it as a viable option. Senior citizens should see it as a workable fallback option when finances are a constraint. After all, the loan can be paid back and the ownership of the property can be reverted to the owner,” informs Puri.

Other remedies to make the product more acceptable in India include providing some flexibility in the age group of borrowers. In Indian context, for instance, with average life expectancy of seniors at 65 years (census- 2011), such product is less accomplished and preferred due to the restricted period of benefits out of the product for borrowers.

“The lender can develop reverse mortgage product with flexibility in the age group with eligibility criteria starting at 50-55+ age group,” says Patel.

Also, the lender should define products and modulations in the offerings with flexibility in the pay-out structures such as increasing the cap limit of loan based on city/tier specific ownerships.

The product also has certain limitations. For example, reverse mortgage decreases one’s home equity compared to the usual case, as with every payment that the bank provides, equity in the house decreases. Also, “post owner’s death, if the house sells for less than the balance loan amount, the lender have to bear the loss as the same is a non-recourse loan,” observes Patel.

One pre-condition for availing loan under reverse mortgage is that the property mortgaged to the bank should also be self occupied with regular payments facilitated by house owner towards property tax, insurance and repairs, and is not allowed to be rented out until the loan is fully repaid.

However, despite these limitations, reverse mortgage in the Indian context makes sense for elderly persons owning residential property who, for whatever reason, have no other dependable financial recourse. Also, there are instances of severe rifts within the family which can give an elderly person to choose to encash rather than bequeath the property.

Finally, reverse mortgage can be used as a temporary fallback option. In other words, reverse mortgage can be availed of for a certain amount which can then be paid back in a predictable period so that the ownership of the property is returned to the owner.

Industry experts say that reverse mortgage schemes have already proven to be a very effective tool to supplement old age income in the Western countries. So in India also it can be made successful by proper marketing of the product, and increasing the tenure of the loan to life time as opposed to the 20 years limit now.

True, reverse mortgage initially did not find many takers as it was a loan product from banks with a fixed term payout. The payout was also very low and so not attractive enough. Thankfully, to bridge the said gap and make it more appealing and beneficial, some banks in association with some life insurance companies have now come out with Life Time Annuity Product where banks give a loan up to a specified value of the house and purchase life time annuity for this amount from insurance companies. The annuity is much higher than the fixed-term product and is payable to both the husband and the spouse. The annuity is paid by the company through the bank directly to the borrower’s account.

“Initially this annuity was taxable, which was again a drawback. However, making it tax-free recently has been the most attractive decision for reverse mortgage buyers. Now one can avail a tax-free life-time annuity from the respective bank under a reverse mortgage scheme,” says Solanki.

Hopefully, with life-time tax-free annuity, the product may see some acceptance from the retirees in India too!